Question

Wealth comes from production, inflation is like a tax, and the real wag is a rough measure of the living standard of the average worker. How fast, in real terms, does production grow in the U.S. on average over time? How fast do prices increase on average? How fast does the real wage grow on average?

Answer 1

According to the Department of Labor, U.S. productivity growth was fairly strong in the 1950s but then declined in the 1970s and 1980s before rising again in the second half of the 1990s and the first half of the 2000s. In fact, the rate of productivity measured by the change in output per hour worked averaged 3.2% per year from 1950 to 1970; dropped to 1.9% per year from 1970 to 1990; and then climbed back to over 2.3% from 1991 to the present, with another modest slowdown after 2001.

Productivity growth is also closely linked to the average level of wages. Over time, the amount that firms are willing to pay workers will depend on the value of the output those workers produce. If a few employers tried to pay their workers less than what those workers produced, then those workers would receive offers of higher wages from other profit-seeking employers. If a few employers mistakenly paid their workers more than what those workers produced, those employers would soon end up with losses. In the long run, productivity per hour is the most important determinant of the average wage level in any economy.

Average hourly earnings only increased 2.7% over the year in June, which means that most workers' paychecks actually aren't going any further at all.